Vanguard probably has the most well-known and efficient financial products in the US. Many of their most infamous products are index funds which were created by Vanguard founder Jack Bogle in the early 1970s. But which Vanguard index funds are actually the best and which of these should you invest in?
The best Vanguard index funds are VTI, VXUS, BND, VOO, and BNDX. Not only are they part of the classic 3-fund portfolio but also offer immense advantages over other funds. They are all low-cost, efficient, and well-diversified. These Vanguard index funds should constitute the basis of your ETF portfolio.
FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!
Introduction
In this post, I will examine whatever gold Index von luxury ist, how it differs from a mutual fund, and what the best index fund is in terms of performance and dividend payout.
In the second part of this article, I will list the top 5 Vanguard index funds – not necessarily by performance but by their ability to get you to financial freedom as fast and as stable as possible.
FYI: The best way I've found to invest is through M1 Finance. It's free and you even get an instant line of credit and 100$! Have a look here (link to M1 Finance).
What is a Vanguard index fund?
Before 1970 index funds pretty much did not exist. Either you could buy individual stocks through a broker or you also had the option of buying an actively managed fund. When Jack Bogle the founder of Vanguard came up with the idea of creating an entirely passively managed fund he was ridiculed.
However, the laughter soon stopped when even the savviest analysts realized that Jack’s index funds outperformed the actively managed ones. And thus, the Vanguard index fund was born.
Ever since then Vanguard has been an innovator and leader in the field of index funds for retail investors. Their entire company philosophy is aimed at leveling the playing field among institutional and private investors and so they have continued to strive to reduce fees and increase performance.
An index fund is simply a basket of individual securities that are tracked by an index and not actively managed.
What is the best Vanguard index fund?
As investors we of course like to know so which index fund offers the highest Returns however this is not always easy to say a lot of times we need to look at a longer time frame to even compare two funds and come up with significant differences.
Another relevant factor could be your risk tolerance: for instance, you might be less or more inclined to invest in a fund that offers a 20% return but also has a risk of significant downturns. This will especially be the case if you are looking to live off of your portfolio and thus may prefer a more stable ride.
However, for the sake of this article, I will focus on the Vanguard index funds with the best overall performance as well as the one-way with the highest consistent dividend payout.
Which Vanguard index fund has the highest return?
The Vanguard index fund with the highest overall return in the past decade is the Vanguard information technology ETF.
This exchange-traded fund includes mostly large-cap tech companies that have experienced a very favorable past decade in growth and profits.
| Portfolio | Initial Balance | Final Balance | CAGR |
| VGT | $10,000 | $71,996 | 13.50% |
I can see from the grave in the table above, the Vanguard information technology index fund has grown 13.5% annually on average. This is close to double the growth rate of the s&p 500 – just to give you an idea.
Despite its phenomenal growth, the fund has yet to experience a major downturn. A $10,000 portfolio would have yielded is a small fortune by now as you can tell.
Which Vanguard funds pay the highest dividends?
The Vanguard high dividend yield index fund ETF (VYM) has consistently paid out the highest dividends among all of Vanguard index funds.
This fund seeks to pay the highest possible dividends to investors available at the current time and is in contrast to the Vanguard dividend appreciation fund a more aggressive dividend-focused index fund.
As you can see from the table above, VYM currently yields about 3.75% per annum. However, this is the case while the stock market currently remains at record highs.
It’s not uncommon for this fund to pay out north of 5 or 6% in dividends per year. These 5 or 6 percent per year can be especially valuable in years when equities are not appreciating in value you as much as they tend to do on average.
A variation of vanguard high dividend yield index fund is the Vanguard International High Dividend Yield Index Fund ETF Shares (VYMI).
This fund also aims to pay out the highest dividends possible at the current moment but what is focused on international high dividend-paying securities.
The dividend yield for VYMI is currently and has been historically even higher than that of VYM.
The third more conservative option for vanguard index funds that pay high dividends is the vanguard dividend appreciation ETF. This vanguard index fund is comprised of companies that have increased their dividends for at least 10 consecutive years.
With VIG you are sacrificing returns and dividends now for later appreciation. Since the dividend yield is always measured against the current ETF price, your or as dividends or slowly increased.
NOTE: The easiest way to add diversification to your portfolio is to invest in real estate through Fundrise. You can become private real estate investor without the burden of property management! Check it out here (link to Fundrise).
What are the top 5 Vanguard index funds?
The following section lists the top 5 Vanguard index funds. This is my personal selection based on a bunch of criteria from performance to diversification.
However, the main goal of this fund selection is to highlight the simplicity of achieving financial freedom.
1. VTI
VTI owns more than 3,500 shares with a mere 0.03 percent cost ratio. It is largely linked to the industries of technology, healthcare and financial services and is made up of more than 75 per cent of large-cap firms. Despite an annual variance of 15.04 percent, VTI witnessed its highest drawdown of -50.84 percent in 2008. The ETF has a 7.97 percent compound annual growth rate ( CAGR).
Vanguard’s total stock market index fund is probably the most well-known ETF on the market. It is comprised of more than 3500 securities encompassing the entire US stock market.
This Vanguard index fund makes for an excellent basis for any well-balanced portfolio. Once you have exposure to the entire market, you can begin to niche down a bit more.
Although there are funds that have performed better than VTI, they do not have the same historical track record and typically include for fewer companies. In short: if you believe in the future of the United States as an economic power in the world, you should own VTI.
If you’d like to learn more about VTI click here to read my extensive VTI review.
2. VXUS
The Vanguard Total International Stock ETF (VXUS) holds over 7,000 international shares and has a 0.08 per cent expense ratio. This consists primarily of stocks in the large-cap European, Pacific and Emerging Markets. VXUS has an annual volatility of 14.16 per cent over the past decade and a maximum drawdown of over 25 per cent. The average compound growth rate to date is 4.72 per cent per annum.
Vanguard’s Total International stock market fund serves to complement their domestic ETF. The international fund holds securities from all major in developed nations as well as developing markets in the Asia-pacific region and Latin America.
Historically VXUS has returned less than the United States market, however, studies have shown that a 10 to 15% exposure to international stocks can smooth your portfolio growth and perhaps even increase performance.
VXUS gets this job done at impressively low fees and an incredible diversification of securities. In a globalized world VXUS should definitely be a part of your portfolio.
If you’re interested in diversifying your portfolio internationally and want to see what VXUS can offer click here to read my complete VXUS review.
3. BND
Vanguard’s Total Bond Market ETF (BND) tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and has a compound annual growth rate (CAGR) of 3.32%. It also boasts an expense ratio of only 0.035% which is extremely low compared to other funds of its kind. It is composed mostly of AAA-rated bonds with a maturity of 20-30 years. Bond ETFs tend to be less volatile than equities and with an annualized volatility of 3.28% BND is no exception.
This third fund is the Vanguard total bond market ETF. Together with the funds mentioned above, it completes the typical three-fund portfolio.
BND holds bonds from the entire US bond market. This includes short-term intermediate and long-term corporate bonds. Municipal and government bonds or treasury bonds are not included.
An allocation of 25 to 50% has shown to reduce the volatility of equities and enhance portfolio returns. Typically the older you are the higher the percentage of bonds will be in your portfolio. This is especially true if you plan on living solely from your stock holdings since bonds provide a more stable source of fixed income.
4. VOO
Vanguard’s S&P 500 ETF tracks holds the 500 securities in the S&P 500 index. It has a CAGR of 12.09% with an expense ratio of just 0.03%. VOO is quite volatile and experiences drawdowns of up to -19.58%. It is heavily exposed to the tech, healthcare and financial services sector and slightly outperforms the entire stock market.
The next to Vanguard index funds I’m going to discuss is not part of the three-fund portfolio but is certainly worth looking at. Vanguard’s s&p 500 ETF increase five hundred companies the s&p 500 Index.
Historically this fund has actually outperformed Vanguard’s total stock market fund which is one of the reasons I have included it here. It also provides you with broad exposure to large-cap us stocks and simply cuts out any small-cap companies.
5. BNDX
Overall, with a compound annual growth rate ( CAGR) of 4.57% vs. 4.16%, BNDX performs better than BND. Also, BNDX is less volatile than BND, and has lower drawdowns. Only U.S. bonds with mostly high credit ratings make up BND. BNDX consists of international bonds with different credit ratings, from AAA to BBB.
BNDX relates to BND as VXUS does to VTI. It is is the international version of the total us bond market fund. This means it excludes bonds of United States corporations and includes bands from all over the world.
It is comprised of debt from all major developed nations as well as the developing parts of the age of the Asia Pacific region and middle and South America.
BNDX makes for an excellent addition to an already well-balanced portfolio and offers a simple way to include international bonds in your holdings.
ALSO: Small-cap equities can add a lot of upside to a portfolio while mitigating risks. Recently, I've discovered Mainvest's investment platform which makes it easy to invest in small and local businesses with returns of 10-25%. Take a look here (link to Mainvest).
Conclusion
Vanguard is certainly one of the best in the industry when it comes to producing high quality and low-cost financial products. Not only have they managed to optimize their index funds but also offer a completely unique structure and that puts investors in the driver’s seat.
Vanguard index funds are part of any well-balanced portfolio and will continue to dominate the retail investment space as long as they provide the value they set out too.
The top Vanguard index funds include VTI, VXUS, BND, VOO, and BNDX. These funds make up a large portion of the entire stock market and can be combined into various portfolios with a solid base exposure to the stock market.
You pretty much cannot go wrong when choosing between these funds. The only ratio that will likely be crucial to watch is the balance of stocks and bonds. The general rule is: the younger you are are the more exposure to stocks you will want.
Current recommendations:
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.
I believe that money is just a means to an end: to be free to spend your time as you wish, to maximize your positive impact on the world.
